The government will soon take a decision on tweaking the foreign portfolio investor (FPI) surcharge proposal, which has spooked the markets since its announcement in the Budget last month.
According to official sources, changes could include exempting or ring-fencing FPIs structured as trusts or associations of person, a step which may require only a circular; reducing the impact of the tax by grandfathering their income for a few months; or making the transition from a trust structure to a company structure tax-neutral. “Currently, multiple options are on the table and no decision has been finalised yet. A few measures will be announced soon, now that the finance minister has met FPIs and market participants,” a government official told Business Standard.
On Friday, Finance Minister Nirmala Sitharaman, along with ministry officials, met representatives of mutual funds, investment banks, FPIs and others. Participants said after the meeting that it was mostly a one-way communication, wherein officials including Economic Affairs Secretary Atanu Chakraborty heard them out, but were non-committal on the specifics of what the government would do. Market participants discussed various issues, including the ease of investing for both domestic and foreign players. "The FM has said that these issues would be resolved in a time-bound manner," said a participant.
Besides FPI surcharge, other issues that were discussed include abolishing the long-term capital gains tax, a review of the dividend distribution tax, simpler Know-Your-Customer (KYC) norms for FPIs, need for a stable tax regime, and reducing cost of transactions.
FPIs who participated in the meeting included Goldman Sachs, Nomura, Blackrock, CLSA, Barclays, and JP Morgan.
“We are hopeful that some decisions will be taken after today’s meeting, that these discussions will lead to quick actions,” said a representative who attended the meeting.
Market players talked about the current state of the economy and the financial markets. They said there was a need for companies to raise equity and debt capital for growth to return, and for this, market sentiment had to improve. They talked about whether the LTCG tax and the surcharge hike on FPIs could be revisited, and whether LTCG was really required when investors were making losses. Industry players spoke about the difficulty in building the bond market, especially considering a large section of investors remained risk averse.
Participants spoke of easing KYC requirements and whether a uniform banking or Aadhaar-based KYC could be developed for investing across the capital market. Market players suggested EPFO money can be invested across indices, other than the Nifty and Sensex stocks.
According to sources, FPIs discussed the impact of the surcharge hike on non-corporate FPIs and the difficulty in converting from trust to corporate structures. The possibility of brain drain and the hike dissuading overseas fund managers of Indian origin managing offshore funds from shifting to India was also discussed. FPIs spoke about making section 9A more attractive and easing restrictions on FPIs in the debt market.
The equity benchmarks rose for a second straight session on Friday amid hopes that the government may take some market-friendly measures to jumpstart the sluggish economy and assuage investor concerns over taxation.
The meeting is part of the exercise being undertaken by the minister to firm up steps to increase investments and boost economy, which is showing signs of slowdown. During the meeting, it was also suggested that employees’ provident fund should be increase its exposure in the stock market, which in turn would improve liquidity, industry and official sources added.
Talking to reporters after the meeting, Vikaram Limaye, CEO and MD of the NSE, said the minister was “very receptive”. He, however, did not elaborate on the discussions. President of Association of National Exchanges Vijay Bhushan suggested that transaction cost in capital markets should be reduced and brought in line with the global rates.
Raman Aggarwal, chairman of Finance Industry Development Council, was of the view that there is a need to look beyond banks for funding of NBFCs. He was for setting up a National Housing Board (NHB)-like regulator for the NBFC sector as well.
In her Budget speech, Sitharaman had said: “Those in the highest income brackets, need to contribute more to the nation’s development. I, therefore, propose to enhance surcharge on individuals having taxable income from Rs 2 crore to Rs 5 crore, and Rs 5 crore and above so that effective tax rates for these two categories will increase by around 3 per cent and 7 per cent respectively.” She backed the decision in the discussion on the Budget in Parliament and the Finance Bill was passed without any changes on this front.